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On July 31, the District Court for the Central District of California entered judgment in favor of the court-appointed receiver for defendants against the non-party provider of payment processing and escrow services to defendants and its managing member in the amount of $75,000, following a July 10 order requiring defendant to pay $243 million in redress and civil penalties. These judgments were entered in connection with the lawsuit filed by the CFPB, along with the Minnesota and North Carolina attorneys general, and the Los Angeles City Attorney, against a student loan debt relief operation for allegedly deceiving thousands of student-loan borrowers and charging more than $71 million in unlawful advance fees (covered by InfoBytes here).
The defendant companies and one of the controlling business partners settled in 2020, but the court ordered the remaining controlling business partner to pay $243 million in redress and civil penalties earlier in July based on his involvement in violating various laws through the operation, including the TSR and the CFPA. Of the $243 million, the CFPB is entitled to over $95 million as redress for unlawful fees paid by consumers affected by the student loan debt relief operation and nearly $148 million of civil money penalties, and Minnesota, North Carolina, and California are each entitled to $5,000 of civil money penalties. The recent judgment of $75,000 entered against the non-party payment processing service provider resulted from the settlement of a separate lawsuit alleging that the service provider facilitated the fraud perpetuated by the defendants in the student loan debt relief operation and later attempted to deceptively transfer consumer funds held by defendants to avoid their transfer to the receiver.
On July 7, the U.S. District Court for the Central District of California entered a final judgment and order against an individual defendant accused of operating and controlling a deceptive student loan debt relief operation. As previously covered by InfoBytes, in 2019, the CFPB, along with the Minnesota and North Carolina attorneys general and the Los Angeles City Attorney (together, the “states”), announced an action against the student loan debt relief operation for allegedly deceiving thousands of student loan borrowers. The Bureau and the states alleged that since at least 2015, the debt relief operation violated the Consumer Financial Protection Act (CFPA), Telemarketing Sales Rule (TSR), FDCPA, and various state laws by charging and collecting over $95 million in illegal advance fees from student loan borrowers. In addition, the Bureau and the states claimed that the debt relief operation engaged in deceptive practices by misrepresenting the purpose and application of the fees they charged and the nature and benefits of their services. Specifically, the debt relief operation allegedly failed to inform borrowers that, among other things, (i) they would request that the loans be placed in forbearance and interest would continue to accrue during the forbearance period, thereby increasing the borrowers’ overall loan balances; and (ii) it was their practice to submit false information about the borrowers to student loan servicers to try to qualify borrowers for lower monthly payments. The individual defendant was accused of owning, controlling, and managing the student loan debt relief operation, materially participating in the operation’s affairs, and providing substantial assistance or support while knowing or consciously avoiding knowledge that the operation was engaging in illegal conduct.
The individual defendant was held liable, jointly and severally, in the amount of approximately $95,057,757, for the purpose of providing redress to affected borrowers. Because the individual defendant was found to have recklessly violated the TSR and the CFPA, the court also imposed second-tier civil monetary penalties of $147,985,000 to the Bureau, of which $5,000 will be paid to each state. The final judgment also imposes various forms of injunctive relief, including permanent bans on engaging in consumer financial products or services and violating the TSR, CFPA, and similar laws in Minnesota, North Carolina, and California. The individual defendant is also prohibited from disclosing, using, or benefiting from customer information obtained in connection with the offering or providing of the debt relief services, and may not “attempt to collect, sell, assign, or otherwise transfer any right to collect payment from any consumer who purchased or agreed to purchase” a debt relief service from any of the defendants.
On June 30, the U.S. Supreme Court issued a 6-3 decision in Biden v. Nebraska, striking down the Department of Education’s (DOE) student loan debt relief program (announced in August and covered by InfoBytes here) that would have provided between $10,000 and $20,000 in debt cancellation to certain qualifying federal student loan borrowers making under $125,000 a year.
The Biden administration appealed an injunction entered by the U.S. Court of Appeals for the Eighth Circuit that temporarily prohibited the Secretary of Education from discharging any federal loans under the agency’s program. (Covered by InfoBytes here.) Arguing that the universal injunction was overbroad, the administration contended that the six states lack standing because the debt relief plan “does not require respondents to do anything, forbid them from doing anything, or harm them in any other way.” Moreover, the secretary was acting within the bounds of the Higher Education Relief Opportunities for Students Act of 2003 (HEROES Act) when he put together the debt relief plan, the administration claimed.
In considering whether the secretary has authority under the HEROES Act “to depart from the existing provisions of the Education Act and establish a student loan forgiveness program that will cancel about $430 billion in debt principal and affect nearly all borrowers,” the Court majority (opinion delivered by Chief Justice Roberts, in which Justices Thomas, Alito, Gorsuch, Kavanaugh, and Barrett joined) held that at least one state, Missouri, had Article III standing to challenge the program because it would cost the Missouri Higher Education Loan Authority (MOHELA), a nonprofit government corporation created by the state to participate in the student loan market, roughly $44 million a year in fees. “The harm to MOHELA in the performance of its public function is necessarily a direct injury to Missouri itself,” the Court wrote.
The Court also ruled in favor of the respondents on the merits, noting that the text of the HEROES Act does not authorize the secretary’s loan forgiveness plan. While the statute allows the Secretary to “waive or modify” existing statutory or regulatory provisions applicable to student financial assistance programs under the Education Act in connection with a war or other military operation or national emergency, it does not permit the Secretary to rewrite that statute, the Court explained, adding that the “modifications” challenged in this case create a “novel and fundamentally different loan forgiveness program.” As such, the Court concluded that “the HEROES Act provides no authorization for the [s]ecretary’s plan when examined using the ordinary tools of statutory interpretation—let alone ‘clear congressional authorization’ for such a program.”
In dissent, three of the justices argued that the majority’s overreach applies to standing as well as to the merits. The states have no personal stake in the loan forgiveness program, the justices argued, calling them “classic ideological plaintiffs.” While the HEROES Act bounds the secretary’s authority, “within that bounded area, Congress gave discretion to the [s]ecretary” by providing that he “could ‘waive or modify any statutory or regulatory provision’ applying to federal student-loan programs, including provisions relating to loan repayment and forgiveness. And in so doing, he could replace the old provisions with new ‘terms and conditions,”’ the justices wrote, adding that the secretary could provide whatever relief needed that he deemed most appropriate.
The Court also handed down a decision in Department of Education v. Brown, ruling that the Court lacks jurisdiction to address the merits of the case as the respondents lacked Article III standing because they failed to establish that any injury they may have suffered from not having their loans forgiven is fairly traceable to the program. Respondents in this case are individuals whose loans are ineligible for debt forgiveness under the plan. The respondents challenged whether the student debt relief program violated the Administrative Procedure Act’s notice-and-comment rulemaking procedures as they were not given the opportunity to provide feedback. (Covered by InfoBytes here.)
President Biden expressed his disappointment following the rulings, but announced new actions are forthcoming to provide debt relief to student borrowers. (See DOE fact sheet here.) The first is a rulemaking initiative “aimed at opening an alternative path to debt relief for as many working and middle-class borrowers as possible, using the Secretary’s authority under the Higher Education Act.” The administration also announced an income-driven repayment plan—the Saving on a Valuable Education (SAVE) plan—which will, among other things, cut borrowers’ monthly payments in half (from 10 to 5 percent of discretionary income) and forgive loan balances after 10 years of payments rather than 20 years for borrowers with original loan balances of $12,000 or less.
On June 23, the U.S Court of Appeals for the Fourth Circuit upheld a default judgment entered against a debt relief operation and related individuals accused of violating the TCPA and the West Virginia Consumer Credit and Protection Act (WVCCPA). Plaintiff-appellee alleged she received multiple telemarketing phone calls regarding debt relief offered through lower interest rates on credit cards from the defendants (including the appellants). During discovery, defendants allegedly engaged in “evasive discovery tactics” and “relentless sandbagging,” which resulted in a magistrate judge entering multiple orders to compel. Defendants allegedly continued to call the plaintiff-appellee for more than a year after she filed her initial complaint. Additional defendants (including some of the appellants) were added via amended complaints as she discovered defendants had allegedly “formed a vast and complex web of corporate entities.”
The district court eventually sanctioned the appellants and struck their defenses for, among other things, engaging in a “pattern of concealing discoverable material” and failing to obey court orders. Appellants filed a motion for reconsideration, claiming the sanctions were too harsh and came as a surprise, the discovery abuses were “inadvertent,” and the plaintiff-appellee had not been prejudiced. Plaintiff-appellee then filed a renewed motion for sanctions outlining continued violations by appellants. Eventually, the district court entered a default judgment against the appellants for failing “to respond fulsomely and accurately to discovery requests and to comply with court orders pertaining to those requests.” The sanctions imposed an $828,801.36 judgment plus costs.
On appeal, the 4th Circuit concluded the district court did not abuse its discretion in finding appellants acted in bad faith and entered default judgment against them. The appellate court explained that there are certain circumstances, including this action, “where the entry of default judgment against a defendant for systemic discovery violations is the natural next step in the litigation, even without an explicit prior warning from the district court.” The appellate court further concluded the record contradicted each of the appellants’ arguments and held appellants “had fair ‘indication that sanctions might be imposed against [them]’ for their continued discovery and scheduling order violations.” With respect to appellants’ arguments that the district court awarded damages for the same purported calls pursuant to both the TCPA and the WVCCPA, the 4th Circuit found that penalties under these statutes are not exclusive and that they separately penalize different violative conduct. “[D]amages under the WVCCPA may be awarded in addition to those under the TCPA for a single communication that violates both statutes,” the appellate court wrote, adding that a plaintiff can also “recover separate penalties under separate sections of the TCPA even if the violations occurred in the same telephone call.”
On May 8, the FTC announced that the U.S. District Court for the Central District of California recently issued temporary restraining orders (TROs) against two student loan debt relief companies that allegedly tricked consumers into paying for nonexistent repayment and loan forgiveness programs. According to the complaints (see here and here), the defendants allegedly made deceptive claims in order to lure low-income consumers into paying hundreds to thousands of dollars in illegal upfront fees as part of a purported plan to pay down their student loans. The defendants allegedly made consumers believe that they were enrolled in a legitimate loan repayment program, that their loans would be forgiven in whole or in part, and that most or all of their payments would be applied to their loan balances. The FTC alleges that, in reality, the defendants pocketed the borrowers’ payments. The FTC also charged the defendants with falsely claiming to be or be affiliated with the Department of Education and stating that they were purchasing borrowers’ debt from federal student loan servicers in order to secure debt relief on their behalf. When consumers realized the debt relief program did not exist, the defendants allegedly often refused to provide refunds.
According to the FTC, these deceptive misrepresentations violated Section 5 of the FTC Act and the Telemarketing Sales Rule (TSR). The FTC also alleges that the companies violated the Gramm-Leach-Bliley Act (GLBA), by using deceptive tactics to obtain consumers’ financial information, and the TSR, by calling numbers listed on the National Do Not Call Registry and by failing to pay required Do Not Call Registry fees for access. In issuing the TROs (see here and here), which temporarily halt the two schemes and freeze the defendants’ assets, the court noted that, upon “[w]eighing the equities and considering the FTC’s likelihood of ultimate success on the merits,” there is good cause to believe that immediate and irreparable harm will occur as a result of the defendants’ ongoing violations of the FTC Act, the TSR, and the GLBA, unless the defendants are restrained and enjoined.
On May 1, three individuals accused of allegedly participating in a credit card debt relief scheme agreed to court orders permanently banning them from telemarketing and selling debt relief products and services. As previously covered by InfoBytes, last November the FTC filed a lawsuit claiming the defendants and their affiliated companies violated the FTC Act and the Telemarketing Sales Rule by using telemarketers to pitch their deceptive scheme, in which they falsely claimed to be affiliated with a particular credit card association, bank, or credit reporting agency, and promised they could improve consumers’ credit scores after 12 to 18 months. The defendants also allegedly misrepresented that the upfront fee, which in some cases was as high as $18,000, was charged to consumers’ credit cards as part of the overall debt that would be eliminated, and therefore would not actually have to be paid. Without admitting or denying the allegations, the defendants agreed to the court orders (available here, here, and here) imposing numerous conditions, including (i) a permanent ban on advertising, selling, or assisting in any debt relief product or service or participating in telemarketing; (ii) a broad prohibition forbidding defendants from deceiving consumers about any other products or services they sell or market; and (iii) the surrender of certain property interests and assets that will be used to provide restitution to affected consumers. The orders impose a total monetary judgment of approximately $17.5 million, for which each defendant is jointly and severally liable, to be satisfied by defendants’ surrender of certain assets and subject to a partial suspension of the remainder of the judgment pursuant to defendants’ truthfulness regarding their financial status and ability to pay.
On March 27, Republican lawmakers Representative Bob Good (R-VA) and Senator Bill Cassidy (R-LA) introduced a joint resolution of disapproval under the Congressional Review Act to overturn the Department of Education’s (DOE) student loan debt relief program, which has yet to take effect. As previously covered by InfoBytes, the three-part debt relief plan was announced last August to provide, among other things, up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the DOE, and up to $10,000 in debt cancellation to non-Pell Grant recipients for borrowers making less than $125,000 a year or less than $250,000 for married couples.
Opponents of the debt relief program immediately filed legal challenges after the plan was introduced last August. On December 1, the U.S. Supreme Court agreed to hear the Biden administration’s appeal of an injunction entered by the U.S. Court of Appeals for the Eighth Circuit that temporarily prohibited the Secretary of Education from discharging any federal loans under the agency’s student debt relief plan (covered by InfoBytes here). In a brief unsigned order, the Supreme Court deferred the Biden administration’s application to vacate, pending oral argument. Shortly after, the Supreme Court also granted a petition for certiorari in a challenge currently pending before the U.S. Court of Appeals for the Fifth Circuit, announcing it will consider whether the respondents (individuals whose loans are ineligible for debt forgiveness under the plan) have Article III standing to bring the challenge, as well as whether the DOE’s debt relief plan is “statutorily authorized” and was “adopted in a procedurally proper manner” (covered by InfoBytes here). The Supreme Court heard oral arguments in both cases at the end of February.
Good noted in his announcement that more than 120 members of the House signed an amicus brief expressing concerns about the constitutionality of the debt relief program. And last month, the Government Accountability Office issued a letter of opinion stating that the final waivers and modification rules submitted by the DOE last October to streamline and improve targeted debt relief programs (covered by InfoBytes here) constitute rules under the CRA and shall have no force or affect.
On February 28, the California Department of Financial Protection and Innovation (DFPI) announced a settlement with an unlicensed student debt relief company and its owner. The announcement is part of the DFPI’s continued crackdown on student loan debt relief companies found to have violated the California Consumer Financial Protection Law (CCFPL), the Student Loan Servicing Act (SLSA), and the Telemarketing Sales Rule (TSR). According to the settlement, a DFPI inquiry into the company’s practices found that since at least 2018, the company placed unsolicited phone calls to consumers advertising its student loan forgiveness and modification services. The company allegedly gave borrowers the impression that it was a part of, or affiliated with, an official government agency, and would act “as an intermediary between borrowers and the borrowers’ lenders or loan servicers with the goal of helping those consumers lower or eliminate their student loan debts.” The DFPI found that since 2018 at least 790 California consumers enrolled in the company’s debt relief program, whereby the company collected at least $713,000 through up-front servicing fees ranging from $116 to $2,449 from California consumers. By allegedly engaging in unlicensed student loan servicing activities, engaging in unlawful, unfair, deceptive, or abusive acts or practices with respect to consumer financial products or services, and by charging advance fees for debt relief services, the DFPI claimed the company violated the SLSA, CCFPL, and TSR.
Under the terms of the consent order, the company and owner must desist and refrain from engaging in the alleged conduct, rescind all debt relief, debt management, or debt consulting service agreements, and issue refunds to California consumers. The owner is also ordered to “desist and refrain from owning, managing, operating, or controlling any entity that services student loans, or which offers or provides any consumer financial products or services as defined by the CCFPL, unless and until he or the entity has the applicable approvals from the DFPI and is in compliance with the SLSA, CCFPL, TSR, and the Federal Trade Commission Act.”
On February 16, the DOJ filed a complaint on behalf of the FTC against several corporate and individual defendants for alleged violations of the FTC Act and the Telemarketing Sales Rule (TSR) in connection with debt relief telemarketing campaigns that delivered millions of unwanted robocalls to consumers. (See also FTC press release here.) According to the complaint, filed in the U.S. District Court for the Southern District of California, the defendants are interconnected platform providers, lead generators, telemarketers, and debt relief service sellers. Alleged violations include: (i) making misrepresentations about their debt relief services; (ii) initiating telemarketing calls to numbers on the FTC’s Do Not Call Registry, as well as calls in which telemarketers failed to disclose the identity of the seller and services being offered; (iii) initiating illegal robocalls without first obtaining consent; (iv) failing to make oral disclosures required by the TSR, including clearly and truthfully identifying the seller of the debt relief services; (v) misrepresenting material aspects of their debt relief services; and (vi) requesting and receiving payments from customers before renegotiating or otherwise altering the terms of those customers’ debts. The complaint seeks permanent injunctive relief, civil penalties, and monetary damages. Two of the defendants (a debt relief lead generator and its owner) have agreed to a stipulated order that, if approved, would prohibit them from further violations and impose a monetary judgment of $3.38 million, partially suspended to $7,500 to go towards consumer redress due to their inability to pay.
On January 11, a coalition of 22 state attorneys general from Massachusetts, California, Colorado, Connecticut, Delaware, the District Of Columbia, Hawaii, Illinois, Maryland, Michigan, Minnesota, Nevada, New Jersey, New Mexico, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, Washington, and Wisconsin, filed an amicus brief with the U.S. Supreme Court in two pending actions concerning challenges to the Department of Education’s student loan debt relief program. At the beginning of December, the Supreme Court agreed to hear the Biden administration’s appeal of an injunction entered by the U.S. Court of Appeals for the Eighth Circuit that temporarily prohibits the Secretary of Education from discharging any federal loans under the agency’s student debt relief plan (covered by InfoBytes here). In a brief unsigned order, the Supreme Court deferred the Biden administration’s application to vacate, pending oral argument. Shortly after, the Supreme Court also granted a petition for certiorari in a challenge currently pending before the U.S. Court of Appeals for the Fifth Circuit, announcing it will consider whether the respondents (individuals whose loans are ineligible for debt forgiveness under the plan) have Article III standing to bring the challenge, as well as whether the Department of Education’s debt relief plan is “statutorily authorized” and “adopted in a procedurally proper manner” (covered by InfoBytes here). Oral arguments in both cases are scheduled for February 28.
The states first pointed out that under the Higher Education Act, Congress gave the Secretary “broad authority both to determine borrowers’ loan repayment obligations and to modify or discharge these obligations in myriad circumstances.” The Secretary was also later granted statutory authority under the HEROES Act to take action in times of national emergency, which includes allowing “the Secretary to ‘waive or modify any statutory or regulatory provision applicable to the student financial assistance programs’ if the Secretary ‘deems’ such actions ‘necessary’ to ensure that borrowers affected by a national emergency ‘are not placed in a worse position financially’ with respect to their student loans.” The states stressed that while “the magnitude of the national emergency necessitating this relief is unprecedented, the relief offered to borrowers falls squarely within the authority Congress gave the Secretary to address such emergencies and is similar in kind to relief granted pursuant to other important federal student loan policies that have concomitantly advanced our state interests.”
The states went on to explain that the Secretary tailored the limited debt relief using income thresholds to ensure that “the borrowers at greatest risk of pandemic-related defaults receive critical relief, either by eliminating their loan obligations or reducing them to a more manageable level,” thus meeting the express goal of the HEROES Act to “prevent affected borrowers from being placed in a worse position because of a national emergency.” The states also stressed that the Secretary reasonably concluded that targeted relief is necessary to address the impending rise in pandemic-related defaults once repayment restarts. The HEROES Act expressly permits the Secretary to “exercise his modification and waiver authority ‘notwithstanding any other provision of law, unless enacted with specific reference to [20 U.S.C. § 1098bb(a)(1)],” the states asserted, noting that “relevant statutory and regulatory provisions related to student loan repayment and cancellation contain no such express limiting language.”
Secretary Miguel Cardona issued the following statement in response to the filing of more than a dozen amicus curiae briefs: “The broad array of organizations and experts—representing diverse communities and different perspectives—supporting our case before the Supreme Court today reflects the strength of our legal positions versus the fundamentally flawed lawsuits aimed at denying millions of working and middle-class borrowers debt relief.” A summary of the briefs can be accessed here.